Press Release - London Underground PPP: Were they good
deals?
London Underground: Are the Public Private Partnerships likely to
work successfully?
17 June 2004
The National Audit Office reported today that there was limited
assurance that the price of the three Tube PPPs was reasonable, and
some uncertainty about the eventual price although any price
revisions have to meet tests of economy and efficiency. The
complexity of the PPPs resulted from the scale of the deals,
innovative output specifications and a limited knowledge of the
condition of some assets. The resulting deals offer the prospect,
but not the certainty, that improvements will be delivered.
- The planned spending to modernise and upgrade the Tube has a
present value of £15.7 billion over 30 years (£9.7 billion in the
first 7½ years) and, subject to tests of economy and efficiency,
the volume of spending is likely to increase at review after seven
and a half years. Greater price certainty at the outset would have
resulted in a higher price.
- The terms of the deals changed markedly during prolonged
negotiations with the eventual winning bidders. After competitive
bidding, the prices all rose, adding £590 million to the 30 year
cost of the deals. If they deliver performance at bid levels
private sector shareholders stand to receive nominal returns of
18-20 per cent a year. This is about a third higher than on recent
PFI deals but London Underground considered that it was in keeping
with the risks being borne. If the private companies achieve the
lower performance levels set by benchmarks, their real returns
would be between 10 and 17 per cent a year.
- Although repayment is at least 95% guaranteed by the public
sector, borrowing comes at a cost of some £450 million more than
direct Government borrowing. London Underground had to weigh these
extra costs against the potential risk sharing and other benefits
to the Tube presented by the PPPs.
- Compared to London Underground's pre-1997 investment regime,
the resulting deals offer the improved prospect, but not certainty,
that the expected improvements will be delivered. The work will
start two years later than originally planned. Recovering the
maintenance backlog is now expected to take over 22 years rather
than the 15 years originally intended.
It is too early to judge how successful the PPPs will be. There
are financial incentives to deliver better performance but possible
limitations in their impact. Given the volatility inherent in
operations, it is hard to determine whether the benchmarks are easy
or difficult to achieve. In the first year, the performance of the
companies against their contractual targets has been mixed, but in
line with what the private companies forecast in their bids. In
addition, a range of factors may affect some areas of
performance.
Many of the factors which will decide the success of the deals
are in place. The deal is clearly specified and understood and the
parties are building a good partnership in most respects. But there
are important tests ahead in managing ageing assets and ensuring
effective oversight. The oversight mechanisms leave the onus on
Transport for London to give sufficient protection of the public
interest, and require good flows of information from the Infracos
about how they are progressing with asset capability and condition
improvement projects.
There are limits to what the signed deals in themselves can
achieve. The price, scope and funding of the PPPs are reviewed
every 7½ years and so could change. Moreover, there are a number of
other PFI deals that provide Tube services that are critical to the
success of the Underground – including a £1.2 billion, 30 year
contract to deliver power upgrades for the network.
Sir John Bourn said today:
"These are complicated deals, worth a great amount of
money and spanning a long period into the future. I welcome the
fact that there are prospects for improvement to the Tube. But in
the face of the inevitable uncertainty about what the next 30 years
will bring, only time will tell whether these prospects are fully
realised and, therefore, whether the eventual price that the
taxpayer pays is worth it."
Notes for Editors
- This press notice covers two reports by the NAO on the London
Underground Public Private Partnerships: "London Underground PPP:
Were they good deals?" and "Are the PPPs likely to work
successfully?".
- Press notices and reports are available from the date of
publication on the NAO website,
which is now at www.nao.org.uk. Hard copies can be
obtained from The Stationery Office
on 0845 702 3474.
- The Comptroller and Auditor General, Sir John Bourn, is the
head of the National Audit Office which employs some 800 staff. He
and the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 44/04
All enquiries to Mark Strathdene, NAO Press Office:
Tel: 020 7798 7183
Mobile: 07748 181693